British pound forecast: GBP/USD and GBP/JPY – Forex Friday

This morning’s stronger than expected release of UK retail sales (+0.3% m/m vs. -0.4% eyed) and the positive vibes from stronger Chinese data and its central bank overnight, helped to lift the pound and weighed on the US dollar. However, following the release of weaker UK inflation data in mid-week, with headline CPI falling to 1.7% y/y, the Bank of England has been given a greenlight to proceed with more aggressive rate cuts, keeping the British pound forecast modestly bearish. In this week’s edition of Forex Friday, we will look at two popular pound pairs: the GBP/USD and, first, the GBP/JPY.

British pound forecast: GBP/JPY reaches key resistance

The yen’s renewed weakness is starting to worry Japanese officials again after the USD/JPY crossed the 150.00 mark for the first time since early August, yesterday. Let’s see if the Japanese authorities will come out and voice support for the yen and how this might impact the major JPY pairs as we test some key levels. Among the more interesting yen pairs to watch is the GBP/JPY, which has entered a key area of resistance between 195.85 to 197.20.

This area was previously support before it gave way at the end of July along with other JPY crosses when the carry trade unwind was the dominant theme.

While we haven't seen a major reaction from this zone apart from that one time at the end of September, the GBP/JPY has been contained below this zone throughout the first half of this month. Therefore, I wouldn't rule out the possibility of the currency pair resuming lower from around here, but we now need to see some confirmation simply because of the amount of time it has taken for price to show any reaction around the zone. What I'm looking for is a breakdown of price below the short-term bullish trend line that has been in place since the end of last month. That would be the first indication that rates may want to head lower. But even a better bearish signal would be a potential break below support at 193.50, where we also have the 200-day moving average converging with price. This sort of price action is what I'm looking for in terms of confirmation for this pair before turning bearish on it again.

However, the bulls would argue that because price has taken its time below this key area of resistance which implies the selling pressure is weak and that may actually push through here and trigger a short squeeze rally in the coming days.

If the bullish scenario plays out, then this would be entirely due to weakness in the Japanese yen rather than strength in the British pound, because the latter has not been supported much in recent times because of economic news – today being an exception. Indeed, with the UK inflation falling below the Bank of England's target this week, it is likely that the UK central bank is going to accelerate the pace of its rate cuts in order to support the economy moving forward.

British pound forecast: GBP/USD rises to test resistance

Even before the weaker UK CPI data was released in mid-week, Governor Andrew Bailey had hinted that the pace of easing could increase if inflation data allowed it. Now we have the confirmation he needed, the pound is likely to remain under pressure and come under selling pressure on every recovery attempts. Still, a divided Monetary Policy Committee (MPC) could mean a more cautious 25 bps cut could be on the way at the BoE’s next meeting.

From a technical point of view, the GBP/USD tumbled below the 1.3000 mark this week to hit its lowest point since August 20, before rebounding. Now, it has arrived at an interesting area near 1.3050 to 1.3080, where it had previously encountered selling pressure. Can it resume lower from here? The next target below the 1.30 handle is around 1.2870, which marks the breakout point from mid-August. Below that, 1.2800 becomes the next significant level, where the 200-day moving average also comes into play.

Focus turns to US presidential election

The GBP/USD’s broader trend remains bearish, and the US dollar is likely to remain supported ahead of the upcoming US presidential election. With Donald Trump gaining ground in the polls, markets are beginning to factor in a possible win, which could keep the greenback supported. A Trump victory would likely pressure currencies such as the Chinese yuan, Mexican peso, and euro, with the British pound also feeling some downside pressure. Trump’s recent hawkish rhetoric on tariffs, specifically targeting European and Mexican car imports, has bolstered the greenback. If Trump wins the election, the US dollar could see even further gains. Some of the recent dollar buying already reflects growing confidence in a Trump victory.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R